Economic and Financial Review
ECCU: 2021 Half-Year (2021H1)

Overview

Snapshot of Economic and Financial Developments for 2021H1

• More than a year since the outbreak, economic activity in the ECCU continued to be adversely impacted by the COVID-19 pandemic.
  
• Economic activity is estimated to have contracted in the first half of 2021 (H1-2021) ¹ relative to the comparative period and its pre-pandemic average levels, with widespread contractions across most member countries.
• The contraction was mainly due to sharp declines in tourism and allied services sectors, which account for a significant proportion of the economic output of member countries.
• Notwithstanding the estimated fall, indicators of economic activity suggest that member countries have gradually begun to recover following the unprecedented economic contraction in 2020.
• Economic activity projected to return to modest growth in 2021 supported by the extensive vaccination programmes in many advanced countries which have facilitated the resumption of global travel
• There are however significant risks surrounding this outlook.
• Risks include the evolution of the virus, including the emergence of the more contagious Delta variant, the success and uptake of vaccines in the ECCU and worldwide, and the ability of member countries to manage new outbreaks of the virus.

The Economy (Real Sector)

Economic activity in the regional economy began to gradually recover in the latter part of the period, although overall activity in the first half of 2021 contracted relative to the previous year.

Tourism

Despite the resumption of global travel and the gradual vaccination uptake, tourism activity is estimated to have contracted. Over the review period, total tourist arrivals to the region declined by 89.8 per cent to 164,183, driven by falloffs in the stay-over (49.4 per cent) and yachting (90.9 per cent) segments, while cruise calls remained suspended in most member countries throughout the period (See Figure 1).

The outturn of all three segments remained firmly below their pre-pandemic average levels, illustrative of the unprecedented impact of the pandemic on the industry. The fall in stay-over arrivals reflected declines from all source markets, with the sharpest contractions in Canada (95.5 per cent), the Caribbean (81.7 per cent) and the United Kingdom (80.1 per cent). The sharp declines in Canada and the United Kingdom reflected a number of travel and other restrictions introduced by Canada and the United Kingdom during the period to help contain virus transmission.

Fig 2: Source Markets for ECCU Stayover Arrivals.

Notwithstanding the overall contraction in arrivals, Saint Lucia recorded a notable 44.8 per cent year-on-year increase in the USA source market in the period, indicative of pent-up demand and the gradual recovery following global travel resumption.

Fig 3: Year-on-Year Visitor Arrivals by Country.

Consumer Prices

Consistent with a rebound in global economic activity, upward price pressures resumed in the ECCU. A combination of surging energy prices and lower disinflationary pressures on food contributed to a 0.9 per cent rebound in the Consumer Price Index (CPI) in the first half of 2021.

Fig 4: Period-Average Inflation in the ECCU.

The upward movement in the CPI contrasted with a 1.5 per cent reduction in the corresponding period of 2020. The major price pressures influencing the rise in the index were the fuel and light, transportation and communication and medical care and expenses sub-indices. The increase in price levels which was observed throughout the ECCU except Montserrat ranged from 0.3 per cent in the Commonwealth of Dominica to 1.8 per cent in Anguilla.

Government Operations

During the first half of 2021, governments’ expenditure and revenue patterns continued to be influenced by the ongoing pandemic. In the first half of the year, the aggregated fiscal operations of ECCU central governments resulted in narrowing of the overall deficit of $136.1m, from one of $203.5m recorded in the first half of 2020.

The deterioration reflected a significant widening of the fiscal balances in the Commonwealth of Dominica ($231.1m) and Saint Lucia ($250.6m), which was largely associated with significant capital spending. This deterioration was mitigated by fiscal developments in Grenada, Anguilla and Saint Christopher and Nevis member countries which recorded surpluses over the period.

The aggregated current account deficit in the first half of 2021 narrowed to $88.3m from $159.5m in the comparative period in the previous year, as the disruptive effects of the pandemic waned in a number of member countries. Anguilla, the Commonwealth of Dominica, Grenada and Saint Kitts and Nevis all posted surpluses on the current balances ranging from $6.1m to $119.0m. Current revenue expanded by 2.3 per cent to $2,403.3m, moderately below its pre-pandemic (2015 – 2019) level, which averaged $2,478.4m.

The improvement reflected increases in non-tax and tax revenue of 6.6 per cent and 2.3 per cent respectively. All major tax categories registered expansions, with the exception of tax on international trade and transactions. Notable revenue expansions were recorded in the intake from property tax and non-tax sources, both of which far exceeded their pre-pandemic (2015 – 2019) and most recent (2016 – 2010) five year averages.

Total current expenditure grew marginally (0.2 per cent) year-on-year and amounted to $2,491.5m, surpassing the average levels of the previous five year periods. The marginal expansion in current outlays was mainly due to higher outlays on transfers and subsidies (5.1 per cent) and personal emoluments (2.5 per cent), both of which exceeded their previous five-year averages. The expansions partly reflected increased spending on social support, public administration, and health services as member governments continued to respond to the fallout from the ongoing pandemic. This was mitigated by lower spending on goods and services (6.7 per cent), following significant growth in the comparative period in 2020. Despite this reduction, expenditure in goods and services surpassed its pre-COVID-19 average, indicative of the considerable efforts which have been made to address the pandemic.

Capital expenditure rebounded as a number of member governments invested in large infrastructure projects to help mitigate the impact of the pandemic. Capital spending rose dramatically by 81.4 per cent to $635.5m compared to outlays of $350.4m in 2020. The largest capital outlays were observed in the Commonwealth of Dominica ($276.1m) and Saint Lucia ($127.9m).

The aggregated fiscal operations resulted in a 7.5 per cent ($1.1 billion) increase in total outstanding public sector debt to $15.6 billion as at June 2021 (See Figure 7). The increase was mainly associated with higher external debt, which grew by $851.5m over the period.

Fig 7: Outstanding Public Sector Debt by Country.

Banking Developments (Monetary)

During the review period, deposits and credit in the ECCU banking system expanded, despite the estimated contraction in economic activity. Domestic claims (credit) grew by 8.9 per cent over the first half of 2021, in contrast to a negligible 0.1 per cent contraction one year earlier. Outstanding claims at the end of the period was slightly above the previous five-year average (2016 – 2020). This increase was driven by outstanding claims (credit) to both the private sector and government, which grew by 3.1 per cent and 2.1 per cent respectively (see Figure 8). Within the private sector segment, expansions were observed in outstanding claims for both businesses (5.6 per cent) and households (1.6 per cent).

Fig 9: Percentage Change Claims to Selected Sectors.

The expansion in outstanding credit to these segments was supported by the extension of loan moratoria offered to borrowers across the ECCU member countries as a result of the pandemic. In September 2020, the initial six-month moratorium period, was extended to as much as twelve months, where required.

Banking system domestic deposits also increased during the review period, as seen in all major deposit segments. Following a pandemic-induced contraction in 2020, transferable EC-currency deposits ² resumed its pre-pandemic growth trend, and registered an increase of 7.9 per cent year-on-year. Meanwhile, foreign currency and other EC-currency deposits, recorded year-on-year expansions of 14.0 per cent and 4.7 per cent respectively. The growth in the accumulation of deposits in the review period, reflect the shift in depositors’ spending patterns away from non-essential items as well as greater precautionary savings stemming from the uncertainties of the ongoing pandemic.

Fig 9: Domestic Deposit trends in First Half of 2019 to 2021.

Asset quality of the banking system deteriorated over the period, as layoffs and job losses from the pandemic appear to have heightened credit risks. The ratio of commercial banks’ non-performing loans to total loans (NPL) stood at 11.8 per cent at the end of June 2021, from 11.6 per cent in 2020, well above ECCB’s prudential benchmark of 5.0 per cent. The highest NPL ratio was observed in Saint Christopher (Kitts) and Nevis at 24.4 per cent.

External Trade

External trade developments in the ECCU were headlined by a merchandise trade deficit of $2.952.2m in the first half of 2021, 3.3 per cent wider than the imbalance recorded in the corresponding period of last year.

The larger merchandise trade imbalance was due to a combination of higher import payments ($79.6m) to $3.260.2m and lower export receipts ($15.5m) to $308.0m.

Fig 10: External Trade Components in the ECCU.

The movement in the external balance for the ECCU, generally reflected similar developments in most of the countries as disruptions to international trade eased and the price of energy, a major import commodity spiked globally. However, lower trade deficits were observed for St Kitts and Nevis and Grenada. Consistent with the decline in total arrivals, gross travel receipts fell by 36.9 per cent to $1,066.0m from a gross value of $1,690.3m in the first six months of 2019. Gross travel receipts were considerably below the five-year average of $2,894.2m reflecting the depressed state of the industry.

Outlook

The growth outlook for the ECCU for the remainder of 2021 is projected to improve, albeit at a tepid pace, supported by the steady increase in vaccination rates and resumption of global travel. Given the robust vaccination programmes, unprecedented fiscal support in advanced economies and rising demand, it is projected that a global recovery is underway in 2021. The IMF projects that world economic output in 2021 will expand by 6.0 per cent, with robust performances in the region’s major source markets, including the USA (7.0 per cent) and the United Kingdom (7.0 per cent). This outlook is expected to vary across ECCU member countries, depending on the country-level infections, the rate of vaccination uptake and the degree of fiscal support. This benign economic outlook is however subject to considerable downside risks, which could constrain the region’s projected recovery. The following include downside and upside risks to the outlook for the ECCU.

The emergence of the more virulent and more deadly Delta strain, remains a major risk to the economic outlook for the ECCU. Although tourism and auxiliary sectors have begun to gradually recover, regional growth will depend critically on the evolution of the virus, the availability and acceptance of vaccines and global demand for travel in light of these uncertainties.

Selected Economic Indicators